Analysis: Honda at crossroads as Civic panned, Hyundai looms

TOKYO/DETROIT (Reuters) - When Honda Motor's <7267.T> 2012 Civic debuted at the New York auto show in April, critics universally panned its cheap, hard-plastic interior .

It was a discouraging result for a car that accounts for a fifth of the more than 3 million vehicles Honda sells annually and that was supposed to fend off Hyundai Motor's <005380.KS> Elantra in the increasingly competitive small-car segment.

"When I saw the interior, it worried me," said Tatsuo Yoshida, a Tokyo-based auto analyst at UBS Securities.

"Sure, the mileage was impressive. But Korean brands are upping the ante with game-changing improvements to their cars' interior. For people buying a new car for the first time, they're becoming an increasingly attractive option."

The negative reviews were compounded this week when the influential U.S. consumer watchdog, Consumer Reports, also gave the new Civic a thumbs-down, rating it the 11th best small sedan out of 12 in the U.S. market.

Those problems include a view that Honda's cars are spiraling into mediocrity and threatening the brand's reputation, which was built on smart engineering and innovation with the first Civics produced in the 1970s.

"Honda built its reputation on engineering excellence," said Bill Visnic, an analyst with Edmunds.com, a popular automotive website. "They are becoming kind of a very normal car company."

How well the four-month-old Civic will fare remains to be seen because the March 11 earthquake in Japan has distorted supply. The model's U.S. sales are down 10 percent so far this year.

But if demand proves disappointing once supply constraints disappear later this year, it could threaten Honda's sales projections at a time when investors cite stiffer competition as one of the biggest risks to its performance this year.

"We've always really liked the Civic. It's always been a top pick or close to being a top pick until recently," said David Champion, senior director of Consumer Reports' Auto Test Center.

"(But) when you look at Honda for the past, maybe, three years, they haven't exactly been stellar," he said, adding that recent remodeling, including the Pilot SUV and Insight hybrid, have been a step back from their predecessors.

GOOD QUALITY, NO APPEAL

Keeping American customers happy is crucial because the United States is Honda's most important market, accounting for a third of its sales and even more of its profits.

As of last year, Honda's market share was still an enviable 10.7 percent, making it the country's No.4 automaker. Three of its four core models, the Civic, Accord and CR-V, are either the first or second choice for U.S. consumers in their segments.

Sales figures also show the Civic's share in its segment has risen 2.7 percentage points over the past four years, and that the Elantra's sales have replaced those of General Motors' <GM.N> now-defunct Pontiac and Saturn brands.

Consultancy J.D. Power said Honda's historical popularity was due to its consistently high ranking in its closely watched Initial Quality Study (IQS) measuring durability and reliability, which it said trumped all other factors when consumers purchase a car. In this year's IQS released in June, Honda placed first among mass-market brands, while Hyundai fell below the industry average.

But in another key study measuring satisfaction with a vehicle's overall appeal, J.D. Power touted Hyundai as the most improved brand and placed Honda fourth from the bottom, tying Nissan <7201.T> just below Toyota <7203.T>.

"It's great news for Hyundai," J.D. Power's director of automotive research, Raffi Festekjian, said. "Reliability is important. But you know what? You still need to make a vehicle that is appealing, fund to drive, and comfortable to sit in."

That, critics and consumers say, is where the Civic flops.

"The styling leaves much to be desired...and looks bland and generic next to the styling leaders like the Elantra," one reader wrote about the Civic on Consumer Reports' website. "As a long-time Honda owner, I am really sad that Honda...seems to be doing nothing noteworthy for several years now."

Consumer Reports itself spared few punches.

"The problems that really hurt the Civic's score run deeper and they showed up at our test track. Stopping distances are long. The steering is lightly weighted and comes up short on feedback. Body lean appears early in the corners. The ride is marred by frequent short pitches. And road noise still remains an annoying companion."

Honda's top engineer, Yoshiharu Yamamoto, defended the Civic, including its interior, but conceded it could be better.

"In the past, the U.S. Big Three lost out to us and their position in the market diminished," Yamamoto told Reuters. "We're going to be in that same position if we're not careful (against the Koreans). We can't let that happen."

Analysts said it wasn't too late for Honda to redeem itself. The next Accord model, expected to debut around this time next year, should show a significant jump in fuel economy as Honda mounts a new generation of engines and transmissions. Honda will also have the benefit of lessons learned from the latest Civic.

"If they can achieve the same perceived quality and luxuriousness as Hyundai, I think they can win because they've still got the stronger brand," said UBS's Yoshida.

"But they have to make sure they conquer new customers. Otherwise, they risk going the way of Buick and Oldsmobile, which ended up with only aging customers who remembered the brands' past glory."